As if the global pandemic had not already done the job, the current squeeze on household income caused by cost of living pressures has certainly caused many of us to reflect on our financial resilience.
Now more than ever before, many people realise that implementing income security in the face of unexpected events is central to sound financial planning.
The increase in sales of income protection products over the past year or so (up by nearly 10 per cent in Q1 2022 compared with Q1 2021 according to the Association of British Insurers) is testament to the fact that advisers and consumers are becoming much more sophisticated when it comes to balancing budget and risk in their protection planning.
The breadth of IP products available in the market means it truly represents an inclusive financial planning product with specific variants available for people from all walks of life, from those in higher risk manual occupations through to professionals of all stripes.
However, for the purposes of today’s article we will focus on executive income protection, the IP variant specifically designed to provide selected employees and eligible owners of small and medium-sized business with employer-sponsored long-term sick pay arrangements.
Alan Richardson, head of business protection at LifeSearch says: “Protecting business owners’ income with a suitable insurance policy should be a top priority following a review of their financial resilience.
"If that business owner is also an employee/director of the business, then the executive income protection policy should always be considered for its ability to cover not only the working life of the individual, but also to provide net earned income to continue contributions to their work based pension schemes, unlike personal Income Protection.
"This is especially attractive for those that have retirement plans in mind.”
The Department for Business, Energy and Industrial Strategy’s annual business population report highlights that despite a slight reduction in numbers in 2021, there are still 5.5mn businesses in the UK that each have fewer than 49 employees (up from 4.6mn businesses 10 years ago).
These are the types of businesses that in many cases do not either have the employee numbers, financial resources or required rationale to implement group income protection for the entire workforce.
However, if given the opportunity, these SMEs will often consider the advantages of putting individual executive IP plans in place for specific employees and eligible owners.
Like many financial advice practices these smaller businesses will often be built around the talents, knowledge and commitment of a small number of key individuals.
If any of these key individuals are unable to work for a prolonged period (or even just a matter of weeks) due to illness or injury this can clearly have an impact on both their own financial security and the ongoing performance of the business.
As well as the commercial impact of losing a key individual for a period of time (think about the potential impact on customers and suppliers, disruption to ongoing workstreams and projects, plus the additional strain placed on other employees having to undertake unfamiliar tasks in the absence of a key person), the business may find itself facing further cost pressures brought by funding the sick pay, national insurance and pension contributions of the unwell or injured employee who, for the time being, is not able to contribute to the continued success of the business.